This is why bitcoin doesn’t need an ETF

March 15, 2017 | Tama Churchouse

Today I’m sharing an article written by my friend Tama Churchouse, who with his father, Peter, runs Churchouse Publishing in Hong Kong. Peter and Tama write The Churchouse Letter, a monthly publication about investing in Asia, along with a free email called Peter’s Perspective, which you can sign up for here. Today, Tama writes about why now is the best time to start learning how to trade bitcoin.

This is why bitcoin doesn’t need an ETF

By Tama Churchouse

Last week the top U.S. securities regulator, the Securities & Exchange Commission (SEC) rejected the application for the first publicly traded bitcoin ETF.

Leading into the ruling by the SEC, the price of digital currency bitcoin had rallied 28 percent so far this year. Much of the rise was due to speculation that SEC approval would have led to a rush of capital into the digital currency. (Right now, it’s not easy to buy bitcoin. Last week, we wrote about why you should try anyway.)

Following the SEC announcement, the price of bitcoin fell sharply from around US$1290 to sub-$1000, before bouncing back to back over US$1200.

Is this the end of bitcoin?

The key question now is: Is the SEC’s refusal to grant ETF approval the beginning of the end of bitcoin?

No. And here’s why:

Bitcoin is responding to this news like a regular financial asset.

The price of bitcoin has been volatile, sure… but it’s also behaving like a regular, developing financial asset. It drops on negative news, and rallies on positive news. There are more and more people involved in buying and selling it, and liquidity (that is, the amount of market activity with bitcoin) continues to improve.

As the chart below shows, within a single day, the price of bitcoin fell 18 percent immediately after the SEC decision. But it recovered quickly and is now around 5 percent below its all-time highs.

Bitcoin allows for the transfer of real monetary value between two people that can be indisputably corroborated without the need for approval from any centralised entity. We can now securely and provably exchange real monetary value outside of existing monetary systems.

This is a phenomenal triumph. It represents a step change in how we undertake financial transactions. Nothing about this achievement has changed following the SEC ruling on a bitcoin ETF.

The door is open

The SEC never said “never”. They noted the following:

“The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop… Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.”

Bitcoin remains early in its development, with a total market cap of US$20 billion… that’s about the same as Suzuki Motor (Tokyo Stock Exchange; ticker: 7269) or Dollar General (New York Stock Exchange; ticker: DG).

It’s harder to find reasons NOT to own bitcoin

Here are some of the main reasons to ignore bitcoin I frequently hear:

There have been a number of major cybersecurity breaches affecting bitcoin owners

Bitcoin is the preserve of drug dealers and people engaged in illegal activity

There isn’t proper regulatory oversight of bitcoin

First off, not buying bitcoin because there have been some major hacks and scandals, particularly exchanges (the largest being that surrounding Tokyo-based Mt. Gox in 2014), is like not using a bank because JPMorgan had 83 million accounts compromised by hackers in the same year. It’s like not buying anything with credit cards anymore because department store Target had 40 million credit card numbers stolen in 2013. Cybersecurity breaches are unfortunately commonplace. Bitcoin isn’t more affected by them than your local shop or bank.

Secondly, whilst bitcoin can make sending and receiving money easier for criminals, bitcoin transactions are not anonymous. There’s also no evidence that anything more than a fraction of bitcoin transactions are in any way connected to crime. And the most common medium of wealth transfer for illegal activity?… cash, just like you have in your wallet.

Third, there is a lack of regulatory oversight with regards to how bitcoin is bought, sold and traded. But the bitcoin infrastructure is completely open to scrutiny by some of the world’s smartest people. Bitcoin and blockchain are defined by code. But companies we invest in can go bankrupt. Executives can lie. Employees can cheat and steal.

Bitcoin is not vulnerable to the vast majority of issues that investors face when buying a stock or a bond. And don’t forget… the whole point of bitcoin in the first place is that it was designed to get around the need for any regulation at all.

It’s still a good time to buy

If anything, the SEC’s reticence keeps bitcoin out of a lot of investor portfolios for a while longer. This means you have more time to get familiar with it, and start accumulating some.

I wrote previously that you should buy US$100 of bitcoin. It’s the best way to familiarise yourself with how it all works.

In coming weeks I’ll put together a video on how anyone can buy some bitcoin, walking you step-by-step through the process of buying, storing and trading bitcoin.

In the meantime, good investing,

Tama

About Tama Churchouse

Tama Churchouse spent nearly a decade creating and selling financial derivatives for a global investment bank in Hong Kong. As Lead Analyst he brings technical expertise across the entire asset class spectrum, from equities and index products, to interest rates and credit.

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